(Q. 20 IN B) DEFERRED COUPON BONDS ARE BONDS WHOSE COUPON PAYMENTS...
15. (Q. 20 in B) Deferred coupon bonds are bonds whose coupon payments are
deferred for a specified number of years. That is, there are no coupon payments
during the deferred period. Consider a 15-year deferred coupon bond with
$1,000 face value. The deferred period is the first 5 years in the life of the bond.
After the deferred period, the issuer will pay X% of the par as annual coupons
(i.e. coupons are paid once per year) until maturity to bond investors, with the
first payment occurring 1 year after the deferred period. The bond is yielding 7%
annually and selling for $926.21. What is the value of X?
A) 10.54%
B) 11.26%
C) 12.05%
D) 12.55%
Answer B
The coupons from this bond are a 10-year annuity of X% of the par ($1,000).
This annuity is delayed for 5 years, i.e. the first coupon payment is to be received
at the end of Year 6.
So the price of the bond is given by:
[
1
1
×
)
]
coupon
−
+
t
value
face
r
(
=
Pr
ice
+
+
+
m
n
)
[
1
−
,
)
]
000
$
%
X
10
0
.
07
5
15
=
×
0236
7
×
+
926
21
4460
362
4026
$
0076
⇒
%.
2582
11